SOUTHLAND BUILDING SOCIETY V BARLOW JUSTICE LIMITED HC DUN CIV-2012-412-000331

SOUTHLAND BUILDING SOCIETY V BARLOW JUSTICE LIMITED HC DUN CIV-2012-412-000331 [16 May 2013]IN THE HIGH COURT OF NEW ZEALANDDUNEDIN REGISTRYCIV-2012-412-000331[2013] NZHC 1125BETWEEN SOUTHLAND BUILDING SOCIETYPlaintiffAND BARLOW JUSTICE LIMITEDDefendantHearing: 16 May 2013(Heard at Christchurch)Appearances: M J Borcoski for Applicant/DefendantO G Paulsen for Respondent/PlaintiffJudgment: 16 May 2013JUDGMENT OF ASSOCIATE JUDGE OSBORNE[as to particular discovery and interrogatories]Introduction[1] The plaintiff, Southland Building Society ("SBS") is a bank. It lent $520,000 to a borrower ("the 2008 borrower") partly as to $306,000 in March 2008 and partly as to $214,000 in June 2008. It took security over three properties. Before lending, it received a valuation report by the defendant ("Barlow") of the properties which put the value, two months before the date of the report, at $800,000 plus GST, if any("the Barlow valuation").[2] The borrower defaulted. SBS, as mortgagee, sold the properties.[3] SBS now sues Barlow for the short-fall of $380,504.04. SBS alleges that the Barlow valuation was negligent and, in particular, that it overstated the value of the properties. It alleges that the properties at the date of valuation were worth no more than $380,000 plus GST, if any.[4] Barlow denies negligence. It pleads alternatively that if there was negligence:(a) the negligence did not cause SBS's loss;(b) there was contributory negligence of SBS;(c) SBS failed to mitigate its damage.The present applications[5] Barlow makes two applications –(a) An application for particular discovery under r 8.19 High Court Rules;(b) An application for an order that SBS answer interrogatories under r 8.38 High Court Rules.Further background[6] There was a sequence of transactions by which SBS had previously lent money on the security of the properties. Without determining that the following narrative is fully accurate, I treat it as very likely to be so and take it from an amended pleading which Barlow intends to file:(a) In 2005 the properties were purchased by Adventure Tourism Limited("ATL"), which is a company associated with the same individuals who were involved with the 2008 borrower. ATL obtained a loanfrom SBS to complete the purchase of the properties in 2005 ("the 2005 loan");(b) In about 2007, upon the liquidation of ATL, the properties were transferred to shareholders of ATL and the shareholders obtainedloans from SBS to repay the ATL loan ("the 2007 loans");(c) In about 2008, the properties were transferred to the 2008 borrower, whose shareholders were the previous owners of the properties and the previous shareholders of ATL;(d) When the 2008 loans were made to the 2008 borrower, the loan wasused to repay the shareholders' loan.The thrust of Barlow's argument as to relevance[7] The further background is relied on by Ms Borcoski for Barlow as establishing the relevance of the information sought (both under the discovery and under the interrogatories application). Ms Borcoski submits that this factual background is relevant to two key issues in the proceeding, namely:(a) whether SBS relied on Barlow's valuation report to make the 2008 loans to the borrower pursuant to the term loan agreements; and(b) whether there is a causal link between Barlow's allegedly negligentvaluation report and the losses claimed by SBS.[8] I find force in the submission by Mr Paulsen for SBS that the central issue is whether SBS relied on the Barlow report. The defence based on a lack of causation flows out of the defence based on a lack of reliance. As Mr Paulsen says, they are really two sides of the same coin.[9] Barlow intends to rely at the trial on the following arguments:(a) the 2008 loans made to the 2008 borrower were used to refinance or repay previous lending by the plaintiff to earlier parties which was in turn used to refinance or repay earlier lending to other parties, all associated with earlier purchases of the properties;(b) SBS's decision to make the 2005 loan was prior to the valuation report which is the subject of this litigation; and(c) The losses claimed by SBS in respect of the 2008 loan agreements to the 2008 borrower emanate from the 2005 loan.[10] Ms Borcoski expanded upon that line of argument in her oral submissions explaining that a line of argument open to Barlow may be that SBS in some way felt locked in to the loans and, as a practical or realistic way of getting out of the financial situation that confronted it with such matters as the insolvency of the second set of owners, felt obliged to simply carry the loans forward, albeit to new borrowers.Discovery application[11] Barlow seeks the following additional documents which have not been discovered by SBS:(a) Documents relating to the decision by SBS to make the 2005 loan with security over the properties, including but not limited to loan application forms, documents in support of the loan application form, loan submissions or similar documents prepared by the plaintiff, and any valuation report provided to or obtained by SBS;(b) Documents relating to the decision by SBS to make the 2007 loans with security over the properties, including but not limited to loan application forms, documents in support of the loan application form, loan submissions or similar documents prepared by SBS, and any valuation report provided to or obtained by SBS.Particular discovery – the jurisdiction[12] The jurisdiction relied upon by Barlow for an order for particular discovery isr 8.19 which provides:8.19 Order for particular discovery against party after proceeding commencedIf at any stage of the proceeding it appears to a Judge, from evidence or from the nature or circumstances of the case or from any document filed in the proceeding, that there are grounds for believing that a party has not discovered 1 or more documents or a group of documents that should have been discovered, the Judge may order that party—(a) to file an affidavit stating—(i) whether the documents are or have been in the party's control; and(ii) if they have been but are no longer in the party's control, the party's best knowledge and belief as to when the documents ceased to be in the party's control and who now has control of them; and(b) to serve the affidavit on the other party or parties; and(c) if the documents are in the person's control, to make those documents available for inspection, in accordance with rule 8.27, to the other party or parties.[13] I have previously identified the following aspects of r 8.19, namely inManagh (as liquidator of Titan Building (HB) Limited (in Liq)) v Hasselman1 and adopt:Rule 8.19 (formerly, 8.24) refers to an order for particular discovery, rather than to further and better discovery, but its use is in relation to a situation where a party has provided discovery which is found to be deficient.Rule 8.19 gives the Court a discretion to order particular discovery where there are grounds for believing that a party has not discovered one or more documents or a group of documents which ought to have been discovered.The predecessor rule, r 300, required an applicant to establish that the order is necessary. The present rule does not - an amendment representing a"significant relaxation" of the previous threshold: ANZ National Bank Ltd v Tower Insurance Ltd.The plaintiff must generally establish a prima facie indication the documents are or have been in the party's control, but the plaintiff does not need to prove that the documents actually exist. See Simunovich Fisheries Ltd v Television New Zealand Ltd (No 6).1 Managh (as liquidator of Titan Building (HB) Limited (in Liq)) v Hasselman HC Napier CIV-2011-441-000824, 1 June 2012 at [4]–[6] and [8]–[9].The plaintiff must also establish that the documents sought are relevant as posited by the authors of McGechan at HR 8.19.03(3).The touchstone of relevance should be fashioned or tailored to reflect those matters which will be actually in issue before the Court.(footnotes omitted)[14] I adopt also the approach of Asher J in Air National Corporate Ltd v AIVEO Holdings Ltd,2 in which his Honour favoured an assessment (for r 8.19 purposes) akin to tailored discovery (under rr 8.8–8.10). His Honour noted:3It has been observed that it would be rare that an order would be made for particular discovery if such an order is not necessary to do justice between the parties. I agree with the observation of Wylie J in ANZ National Bank Ltd v Tower Insurance Ltd that this reservation does not go to the basis on which the discretion falls to be exercised. In my respectful view now that the requirement for necessity has been removed it is best to put the concept of necessity to one side. An application for particular discovery can be approached as an assessment of discoverability under the rules, akin to an assessment of a tailored discovery application.(footnotes omitted)[15] I note given that I am going to deal with Barlow's application for an order asto the interrogatories that the threshold requirement that an order in that context be made remains that it is necessary under r 8.38(4) to which I will return .4[16] As to the relationship between the parties' obligation to ensureproportionality (r 8.2(1)(a)) and the concept of tailored discovery (r 8.8), I adopt what I said in Karam v Fairfax New Zealand Ltd:5The discovery rules which came into effect on 1 February 2012 were designed to reduce disproportionate cost and delays caused by discovery and to reduce the tactical use of discovery. They do that in a number of ways. Particularly relevant to this case are the duties to:(a) co-operate to ensure that the processes of discovery and inspection are proportionate and facilitated by agreement on practical arrangements (r 8.2(1)); and2 Air National Corporate Ltd v AIVEO Holdings Ltd [2012] NZHC 2258.3 At [15].4 See below at [54]–[57].5 Karam v Fairfax New Zealand Ltd [2012] NZHC 887 at [131].(b) to consider options to reduce the scope and burden of discovery (r 8.2(2)), such as by standard discovery under r 8.7 (involving an adverse documents regime) or by tailored discovery under r 8.8 (tailoring discovery to meet the interests of justice).[17] The legislated focus on proportionality therefore has a similar purpose to theCourt's traditional focus in discovery matters on whether an order would be oppressive. As I stated in Karam v Fairfax New Zealand Ltd, the concept of proportionality involves a balancing of the time and costs of making discovery against the potential value of discovery.6 It is the concept of proportionality which now reinforces and sharpens the requirement that a discovery order not be oppressive.Should the requested documents have been discovered?[18] I will deal first with this issue, of a relatively technical nature under the HighCourt Rules. (I say "technical" not because there are not issues of substance involved in it but rather because Mr Paulsen's submission invites, in my view, a very narrow interpretation of the wording used in the rule).[19] SBS opposes the making of an order for particular discovery partly on the basis that SBS has already provided discovery in accordance with the original order of the Court. That order was made after counsel agreed the extent of discovery. It is not suggested by Ms Borcoski for Barlow that, as the order then stood, Barlow'sverified list omitted documents of the classes identified.[20] Mr Paulsen says on this basis that Barlow has not established under r 8.19that the documents sought "should have been discovered".[21] The "should have been discovered" test under r 8.19 adopts the same terminology as that previously in r 8.24 and before that, r 300. Neither counsel referred me to any decision in which that part of the wording of the rule has been considered.6 At [137]–[142].[22] The authors of the current versions of both McGechan on Procedure andSim's Court Practice, in their commentaries on this aspect of r 8.19, simply repeat the words of the rule ("should have been discovered"). The most specific discussionwhich I have found, in favour of the approach which Mr Paulsen invites, is in the commentary in Sim's Court Practice as it related to r 300 where the rule was summarised as meaning:Particular discovery may be ordered if it appears that the party has not complied with a discovery order.[23] That commentary does not appear in the current edition in relation to the rule as it now stands.[24] I reject the inherent proposition that the words "should have been discovered"should be narrowly construed so as to mean something along the lines that there cannot be an order for particular discovery unless the respondent is in breach of a discovery order.[25] The needs of litigation often evolve. Such is reflected in r 8.18 which imposes continuing obligations of discovery upon parties, even if the party has filed and served a compliant affidavit of documents. Rule 8.18(2) is particularly relevant in this context. It provides:8.18 Continuing obligations(1) (2) A party must discover a document if, in the course of complying with an order for tailored discovery, that party becomes aware of a document that is not required to be discovered under the order, but that—(a) adversely affects that party's own case; or(b) adversely affects another party's case; or(c) supports another party's case.[26] There is no validity in any proposition to the effect that a party has no obligations other than to simply comply with the terms of a discovery order which is in place. In themselves the continuing obligations under r 8.18(2) must call for theCourt to require a party to produce a document if the Court is satisfied that a document adversely affects or supports one or the other party's case. In theterminology of r 8.19, such a document "should have been discovered".[27] I also conclude that the aggrieved party in this situation may apply in the alternative for an order under r 8.17 varying the terms of an existing discovery order. Rule 8.17 provides:8.17 Variation of discovery order(1) Subject to rule 7.18, a party may apply for an order varying the terms of a discovery order.(2) The variation may be granted by a Judge on the ground that—(a) compliance or attempted compliance with the terms of the order has revealed a need for a variation; or(b) there has been a change of circumstances that justifies reconsideration.[28] Mr Paulsen submitted that the circumstances referred to do not amount to a change of circumstances within the terms of this rule. I reject that view as the expression used by the Rules Committee is, in my view, clearly intended to deal with the widest range of changed circumstances.[29] In particular in this case, the evolution of this defendant's pleadings and case,bringing into relevance an arguably wider or different range of documents, amounts in my judgment to a "change of circumstances that justifies reconsideration" (interms of r 8.17(2)(b)) of the existing discovery order.[30] For those reasons at the first step, I find that the Court has jurisdiction to proceed under both r 8.17 and r 8.19, if the defendant establishes the other threshold requirements in relation to additional discovery.Relevance of the documents sought[31] The grounds upon which Barlow puts its case for the discovery of the sought documents are that they adversely affect SBS's case or that they support Barlow'scase. Those are, of course, tests for standard discovery under r 8.7 but they are also threshold tests for the continuing obligation of discovery under r 8.18(2).[32] Ms Borcoski, in effect, submits that the documentary details of the earlier loan applications will support an erosion of the SBS case (and any evidence SBS adduces) whereby SBS asserts reliance on the Barlow valuation when making the 2008 loans and whereby SBS asserts that a negligent valuation caused SBS's losses. It is implicit in Ms Borcoski's submissions that documents in relation to the 2005 and 2007 loan applications might then be used also as a basis for cross-examiningSBS's relevant witnesses as to reliance in particular (but also possibly as to causation).[33] For SBS, Mr Paulsen submits that the documents sought are irrelevant to any matter in issue. He notes the fact (not disputed) that each of the loans in each of the three years was a new advance to different entities. He notes that SBS was not obliged to make loans and could have required repayment of loans without making a fresh loan to a new owner.[34] Mr Paulsen notes that whether SBS relied upon the Barlow valuation whenmaking the 2008 loans is a question of fact. He submits that the focus of the Court'senquiry at trial will be on whether the Barlow valuation materially influenced SBS to make the 2008 loans. He concludes that there is simply no logic in the Barlowargument that SBS's files relating to the 2005 and the 2007 loans may have a bearing on that issue. The considerations which SBS brought to bear in its decision whether to lend in 2008 will not appear in either of the earlier loan files.[35] Mr Paulsen submitted, that there is also an illogicality in the suggestion that SBS made the 2007 loans and the 2008 loans because SBS in some way felt locked in or committed to the 2005 loan. That was illogical, he said, because in the 2008loans, SBS's lending was not merely maintained but was increased. There is also strength in my judgment in this ground of SBS's objection.[36] Mr Paulsen then considered an alternative scenario. If Barlow intends to argue that SBS would have lent regardless of the value put on the properties in theBarlow valuation, then it is only the 2007 loan which will be relevant as that was the loan outstanding when SBS approved the 2008 loans. He submits that the documents relevant to the 2005 loan would clearly be irrelevant. But he submits that, even in relation to the 2007 loans, it is only the fact of the 2007 loans, perhaps together with the amounts owed under them that would be relevant. He says that those facts are not in dispute. Therefore, he says, that there can be no justificationfor requiring disclosure of SBS's whole 2007 lending file (let alone the 2005 file).[37] I accept Mr Paulsen's submission in relation to the 2005 loan file. Put in terms of his analysis, that file is not relevant to the issues in this proceeding. Usingthe alternative terminology of Barlow's notice of application, the documents on the 2005 file will neither adversely affect the SBS case, nor support the Barlow case. They are neutral on the facts of relevance in early 2008 and of causation then and later.[38] The position in relation to the 2007 file, while weak for Barlow, is not so clear cut in terms of irrelevance. Some of the detail on the file might just have some relevance, if it were in dispute. But if that detail has been agreed or can be agreed, then it no longer relates to an issue for trial and should not be the subject of discovery. Relevant details in this regard are, as Mr Paulsen submitted, the fact of the 2007 loans and both the sums originally lent and the sums still owed under them at the point of repayment. A further relevant fact is the latest valuation figure available to SBS when it made the 2007 loans. Should those details for any reasonnot be the subject of an agreement, Barlow's position can be adequately protected by the leave I will include in the order I make.Disproportionate discovery[39] By reason of the conclusions I have reached, it is unnecessary that I decidewhether, in terms of Mr Paulsen's final submission on discovery, that the discovery sought would be disproportionate. I therefore comment only briefly on this aspect.[40] There is strength also in this ground of objection. SBS's Debt RecoveryManager, Lyndon Insall, has given evidence in which he refers to the difficulty of thetask which SBS would face in compiling the required documents, some of which are archived in hard copy form and others electronically. Some may not be readily traceable. Mr Insall has taken advice from SBS's solicitors and believes that thelegal costs alone incurred in relation to the discovery exercise requested may exceed $10,000 plus GST (including the costs of having documents scanned onto a data base). The figure seems high. That said, the Court is in no position to second-guess the extent of work which would be required. No reply evidence has been filed.[41] I accept the thrust of Mr Paulsen's submissions, namely that the documentssought are at some considerable remove from the central issue in terms of reliance,namely what SBS's officers relied on in early 2008 when making the 2008 loans. Any assistance to be derived by Barlow from the requested historical records would be of marginal assistance at best.[42] That puts into context the contrary submission made by Ms Borcoski for Barlow. She noted the still significant, although not huge by High Court standards,quantum of the plaintiff's claim. Discovery costs of $10,000 do not appear large when compared to the sum sought to be recovered by the plaintiff. Such a submission needs to be placed in its context. The costs will be incurred in relation to what is, if at all relevant, relevant in the most marginal way.[43] I would therefore almost certainly have concluded that, were I to grant the requested orders, the discovery exercise which would be visited on SBS would be disproportionate. But, given my earlier finding, I do not resolve the application on that basis.Costs of discovery[44] It is appropriate in the circumstances of this application that I add this comment as to the costs of discovery. Neither counsel addressed me on the Court'spowers under r 8.22 High Court Rules in relation to the costs of discovery. I did not invite submissions on the issue as I had, in the course of hearing submissions, formed a clear view that the discovery application must be dismissed in any event.[45] Rule 8.22(1) empowers the Court, when making a discovery order, to order that another party meet the costs of the party making discovery if it is manifestly unjust for the discovering party to have to meet the costs of complying with the discovery order. There will be cases where the documents sought on a discovery application, although peripheral and at some remove to the issues in the case, still retain an arguable degree of relevance. Counsel for the requesting party may, for instance, argue that the documents will be necessary for thorough cross-examination of a deponent who is giving evidence as to his belief. Counsel may, for instance, argue that something in the requested documents may inform the line of cross- examination to be adopted.[46] Where, as in this case, there is evidence that the sourcing of the relevant documents may be expensive and the Court concludes the exercise will be disproportionate, an application for particular discovery is likely to be declined where the costs are to fall on the complying party.[47] The costs-shifting regime of r 8.22 is a jurisdiction which an applicant seeking documents of peripheral significance may wish to seriously consider. This may be particularly so where, without readily identifiable information expected to be contained in the requested documents, the requesting party truly wants documents so as to have the entire factual background for the purposes of understanding and testing a matter such as the subjective understanding and intention of one party, or of a witness.[48] Under the modern High Court Rules, r 8.2(1) imposes an obligation on the parties to cooperate to ensure that the discovery process is facilitated by agreement on practical arrangements. A potential applicant for discovery of documents of a peripheral nature may well obtain agreement on practical arrangements for the discovery of peripheral documents if the applicant offers to accept a costs-shifting arrangement of the kind a Court may order under r 8.22. If a proposal on that basisis rejected by the other party, the requesting party's subsequent application may havestronger prospects if the requesting party offers to accept a costs-shifting order under r 8.22 as part of its application. Under r 8.22(2) the Court retains the power to later vary the costs-shifting order where a different allocation of those costs would be just– such an outcome would be likely where the discovery exercise does turn up some document which later proves to be of significance at trial, whether in cross- examination or otherwise.[49] In the event, the outcome of the application in this case would not have been altered by an offer on the part of Barlow to accept such a costs-shifting order.InterrogatoriesThe interrogatories administered[50] Barlow gave SBS notice to answer certain interrogatories in November 2012.[51] Mr Insall provided an affidavit in answer to two aspects of the interrogatories, but refused to answer the two aspects sought on the grounds that they did not relate to matters in question between the parties.The unanswered interrogatories[52] The unanswered interrogatories may be summarised:(a) Interrogatory 2.1 relates to whether, and to what extent, the 2007 loans were used to repay the 2005 loan;(b) Interrogatories 3.1 to 3.5 relate to details of the 2005 loan and matters relating to the decision to lend, such as valuation advice received by SBS.[53] Barlow asserts that the unanswered interrogatories relate to matters in question in the proceeding.Interrogatories – the jurisdiction[54] Barlow invokes r 8.38 which provides:8.38 Order to answer(1) A Judge may, at any stage of any proceeding, order any party to file and serve on any other party (whether the interrogating party or not) a statement prepared in accordance with rule 8.39 in answer to interrogatories specified or referred to in the order.(2) The interrogatories must relate to matters in question in the proceeding.(3) The order may require the statement to be verified by affidavit.(4) The Judge must not make an order under subclause (1) unless satisfied that the order is necessary at the time when it is made.[55] Counsel both made submissions on whether the answers to the interrogatories are relevant to the issues in the proceeding. In this context, the concepts of something being an issue in the proceeding or a question in the proceeding are essentially the same.[56] Ms Borcoski reminded the Court that the test of relevance does not involve only information which directly proves the facts. It can include that which indirectly establishes key facts: Commerce Commission v Air New Zealand Ltd (No. 6).7 To reinforce that submission, she referred to two sources:(a) Section 7(3) Evidence Act 2006 which provides:Evidence is relevant in a proceeding if it has a tendency to prove or disprove anything that is of consequence to the determination of the proceeding.(b) The decision in Bank of New Zealand v Gardner8 which is authority for the proposition that the test of relevance is whether the interrogatory has some bearing on questions in issue and a tendency to establish, or form a step in establishing, the allegations.[57] The interrogatories rule, r 8.38 retains the previously existing requirement that a Judge must be satisfied that any order answering interrogatories is"necessary". That is to be contrasted with the discovery rules where the "necessity"7 Commerce Commission v Air New Zealand Ltd (No. 6) [2012] NZHC 2113 at [18].8 Bank of New Zealand v Gardner (1990) 2 PRNZ 278 (HC) at 282–283.requirement has been deleted. This means that there may be a higher threshold for orders as to interrogatories then exists for orders as to discovery.9The submissions[58] Ms Borcoski submits, for the same reasons as she submits the loan documents themselves are relevant, that the answers to the interrogatories will be relevant to issues.[59] Mr Paulsen adopts the same submissions he had made as to the irrelevance of the documents requested. He observes that both sets of interrogatories under examination (2.1 and 3.1–3.5) are essentially concerned with the 2005 loan –interrogatory 2.1 is concerned with the source of funds that repaid the 2005 loan whereas interrogatories 3.1–3.5 seek details of that 2005 loan and the reasons for the making of that loan.Discussion[60] For the same reasons as apply to the discovery application, I am not satisfied that the requested answers to interrogatories will be relevant to issues at trial.Outcome[61] The applications must be dismissed, subject to one matter on which leave will be reserved.[62] Costs must follow the event on the usual basis.9 See the discussion by Asher J in Bank of New Zealand v Gardner, above n 8.Orders[63] I order:(a) The defendant's application dated 17 December 2012 is dismissed butwith leave reserved to apply should there not be agreement for the purposes of trial on:-(i) the fact of the making of loans by the plaintiff to three sets of trustees identified in paragraph 2.1 of the schedule to thedefendant's interrogatories dated 8 November 2012;(ii) the amounts originally borrowed through those loans and the amounts remaining outstanding immediately prior to repayment of those loans;(iii) the latest valuation figure/s in relation to the properties as held by SBS when making the 2007 loans.(b) The defendant is to pay the plaintiff's costs of the application on a 2B basis together with disbursements to be fixed by the Registrar.Associate Judge OsborneSolicitors:Cavell Leitch Pringle & Boyle, PO Box 799, ChristchurchKennedys – Christchurch Branch, PO Box 29110, Fendalton, Christchurch